SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004

Budgetary slack and its antecedents
Does manager’s power distance matter?
By
Fuad & Arifin Sabeni

Abstract
Studies have provided insights on control systems, but results have not
developed into a widely accepted theory of management control in explaining the
antecedents of budgetary slack. This study attempts to answer the peculiarities and
anomalies shown by prior researches by examining direct effect of diversification,
business unit strategy on budgetary slack, or passing through the intervening
variables, budget emphasis and incentive systems. Manager’s power distance was
postulated to affect the extent of the relationship between the rigidity of budget
emphasis and budgetary slack.
A hundred and one responses from the independent-subsidiaries companies
were gathered and then analyzed by Structural Equation Modeling set up in Lisrel 8.5
and moderated regression analysis with dummy variable. The study found that while
both diversification and business unit strategy significantly affect budgetary slack and
indirectly through budget emphasis, incentive system insignificantly affects the
presence of budgetary slack. Surprisingly, the results suggest that the relationship
between budget emphasis and budgetary slack is negative and stronger for managers
with low power distance than for managers with high power distance, as opposed to
the positive interactions hypothesized that high power distance managers react
favorably to the high emphasis on meeting the budget rather than managers with low
power distance.
Key words: budgetary slack, power distance, business unit strategy, diversification
I. Introduction
The budgetary control systems have been examined widely by many researchers
for almost five decades. One of important areas has been focused on supervisory
style, which has been used to evaluate subordinate’s performance relying on
budgetary information. It was first pioneered by Hopwood’s (1972) seminal paper,
where recent budgeting literature has shown great interest in understanding possible
effects of budgetary control styles.
Later, Most of prior empirical evidences generally maintained that the incidence
of dysfunctional behavior is affected by the tightness of budgetary controls; which is
the condition when employees, mostly at the management organization levels, are
evaluated primarily on whether or not they achieved their budget. It implies,
therefore, all aspects of job prospects and facilities strongly depend on the managers’
ability to attain the budget target. Managers who miss the targets may face the
prospect of interventions by upper management, the loss of organizational resources,
the loss of annual bonuses/incentives, and worst, perhaps, the loss of their job
(Merchant & Manzoni, 1989). Under these circumstances, managers may look for
ways to protect themselves from the downside risk of missing budget targets and the
stigma normally (Stede 2000).

95

please compare. Kaplan 1990. even if corporate managers were able to detect slack.
Moreover. the budget target determined by the
corporate may not as precise as the less diversified firms. business unit strategy is expected to be an important factor for explaining the
presence of slack in business unit budgets. and hence. In order to minimize the existence of budgetary slack. p. corporate are likely to provide the great extent of incentive to their
subordinates.
Nevertheless. the results have been inconclusive
or in some cases. 2-3 DESEMBER 2004
However.
Nevertheless. according to
agency literature. for instance.e. Organization theory has suggested that slack may be
needed to successfully pursue competitive strategies that require a high degree of
flexibility to respond effectively to changes in the environment (Bourgeois 1981). Miller and Friesen
1982. budgetary slack
is presented.
With respect to the existence of national culture (power distance) that was
developed by Hofstede (1980) to moderate the relationship between budget emphasis
and budgetary slack is likely to exist. relates to favorably/unfavorably reaction to a high/low budget
emphasis in a high/low manager’s power distance. the business units (BU) managers may react unfavorably to
the target determined by the corporate by underestimating their “real performance” to
easily achieve the budget target.g. Rather than investing in “high-cost” information systems. Simons 1987. Power distance. those kinds of strategies that pursued by the business unit may also
influence the extent of slack. budgetary slack can also be explained by the uncertainty
involved in a particular industry facing different business unit strategy. These findings contrast with the “popular
views” (e.
98. maintaining that
innovation and differentiation (which is the case of differentiated companies) is best
achieved in organizations that minimize formal controls (i.
Hence. In addition. 1995). since corporate may not have all specific and wide information about
the operation of their subsidiaries. and. as is the case of the more diversified firms
(Campbell et al. The favorably (unfavorably)
reaction indicates the lower (higher) extent of manager’s intention to create budgetary
slack. Govindrajan (1988). the management accounting literature has maintained that the way in
which a business unit competes in its market also influences the design of the
management control system (Langfield-Smith 1997)
Therefore. More slack reduces the chance of a
target being missed. Again. the
less the overload on the top. Govindrajan and Fisher (1990)). Bourgeois
(1981) concluded that slack may be required to successfully pursue competitive
strategy that requires a high degree of flexibility to respond effectively to changes in
the environment (e. low budget emphasis).
On the other hand.
Langfield-Smith (1997) moreover found that the way in which business units
competes in their markets influence the design of management control systems. found that prospectors emphasize rigid budgetary
controls to a greater extent than defenders.SNA VII DENPASAR – BALI. that was defined as “the
difference between the extent to which the superior (in this case corporate) can
determine the behavior of subordinate (business unit managers)” (Hofstede 1980. 1988).
Simons (1987.g. emphasize added). the fewer the exceptions that need to be investigated. Govindarajan 1988). the results of this research have been inconclusive in some cases. Porter’s differentiation and/or Miles and Snow’s prospector). contradictory (for example.
96
.
corporate tend to let this slack exist in their business units. they may
actually tolerate slack in business unit budgets as a conscious strategy to reduce
information overload at the top (Galbraith 1973).

job satisfaction and locus of control
to 83 Mexican managers. outcomes. Particularly.
This main purpose of this study is to determine the situational.
97
.e. Therefore. we posit that:
H1: more diversified firms experienced more budgetary slack in their business units. Corporate managers in
the diversified firms are less familiar with the operations of the distinct business
(Campbell et al.
Therefore. Diversification can improve debt capacity. to contribute to the accounting literature by advancing
“the paths” of determinants of budgetary slack that might have not been examined by
prior researchers. Instead.
national culture measures can be adopted in the setting of specific country as well.SNA VII DENPASAR – BALI.
1
Frucot and Shearon (1991) for instance. 357) and
national culture (Hofstede 1985). no research has been done in Indonesia
that uses this measure as moderating variable to examine the variables hypothesized. 2-3 DESEMBER 2004
Although Chenhall (2003). reduces the chances of
bankruptcy by going into new product/markets (Higgins and Schall 1975. A diversified firm can transfer funds from a
cash surplus unit to a cash deficit unit without taxes of transaction costs (Bhide 1993). Moreover.
II. Therefore. The next section develops in
more detail the hypotheses formulation and then followed by methodology of the
study in Section III. can also
increase labor and capital productivity.
2) This research hopefully will be an advance solution for providing the “generally
accepted results” pertaining the antecedents of budgetary slack. corporate managers are at disadvantage to detect
slack. use or usefulness) of management control systems
implemented over business units may be affected by the extent of diversification. in some specific ways: 1) Indonesia as the third world countries and
“western” countries have shown contrasted value (Noesjirwan 1977. Skill developed in one business transferred to other businesses. we believe that the study of national culture have not always to compare
the behavior of managers in various countries as the contingent factors. as well as firm’s
administrative systems antecedents in the presence of budgetary slack. preliminary test of this study showed that
each individual have “wide variance” of score based on the Hofstede’s questionnaires. Gluck 1985). performance.
The type (i. Inline with prior researches. argued that national culture
differs in particular cultural characteristics. some corporate tend to let slack exist in their
business unit to control the information-processing need by corporate management
(Galbraith 1973). There are many advantages that a firm can get by doing
diversification.
The remainder of the study is organized as follows. Results are reported in Section IV while limitations and avenues
for further research are discussed in the final Section. Hypothesis Development
Corporate diversification is defined as the extent to which a firm is
simultaneously active in “distinct” businesses (Pitts and Hopkins 1982) and a means
by which a firm expands from its core business into other product markets (Andrews
1980. Lewellen
1971). Contingent
argument will also be examined by the moderating role of power distance in the
relationship between budget emphasis and budgetary slack.1
It is interesting therefore. quoting Hofstede (1980). as previously stated. they examined the effect of manager’s power distance and
uncertainty avoidance on the budgetary participation. 1995). more diverse firms may influence the ability of the
corporate to detect the budgetary slack in their business units. p.

Govindrajan (1984. In fact. the business unit operations as such. diversification leads to an increase
in the capacity of information processing by the corporate. principal (corporate manager)
wanted the agent (business unit manager) to provide high effort.
H3: diversified firms tend to intensively give a larger extent of both business unit and
corporate performance-based incentive
There are two typologies that were used widely by behavioral-based budgetary
accounting researchers to measure business unit strategy. customer service. much of the control in diversified firms will be
achieved through financial-results or budgetary controls (Salter 1973. Since effort is
unobservable (Dirsmith 1998).
Moreover. and hence. monitoring financial results requires less intimate knowledge of the
activities of the various business units. they create
something that is perceived by the customer as unique by pursuing superior product
features. since corporate managers in
diversified firms lack specific operation knowledge about the various activities of
their business units. Berg 1969). Often. 2-3 DESEMBER 2004
In accordance with the above preposition.
H2 : more diversified firms put more emphasis on budget target. which is an advantage issue for more
diversified firms. 1988) reconciled the Hopwood (1973) and Otley’s
(1978) results relating to performance. and
having a great understanding of. 1986. etc. incentives were provided for business managers to
motivate them to behave in a manner consistent with the corporate interests. In the other hand.
Fortunately. as previously stated in H2. differentiators and
prospectors actively engage in market and product development. product innovation. In other words. in accordance with H1 above. Business unit managers in diversified firms are likely to have discretion about
more aspects of their work.
Moreover.SNA VII DENPASAR – BALI. On the other hand. Costleadership and defenders for instance. exploit economies of scale
and produce undifferentiated product. which are Porter’s (1980)
Cost-leadership/Differentiator and Miles and Snow (1978) Defender/Prospector. most interactions between corporate and business unit
managers of diversified firms are likely to evolve mainly from budget-related issues. it is expected that they will emphasize accounting-based budget
performance. argued that defenders face relatively low
98
. agency theory predicts that incentives should be most intense
when business unit managers are able to respond to them (Milgrom and Roberts
1992). have greater marginal impact on performance
(Bruns and Waterhouse 1975). This would make the
corporate almost impossible to use direct informal interventions in business unit
operations as a tool of control. Both
are assumed to be similar since they have the “same sense of market oriented”. we expect that the greater autonomy of business
unit managers and the greater reliance on outcome-based budgetary controls in
diversified firms is associated with a higher percentage variable compensation.
as opposed to the operational details of the business. Agency theory
once again suggests that formal monitoring of outcome-based performance and
incentives are complementary. corporate managers in diversified firms
primarily monitor outcome-based budget results without getting involved in.
Furthermore. Thus. they focus on achieving a low cost position
relative to competitors and therefore pursue cost reduction. brand image.

where if they do. Merchant
(1985b) argued that the ability to set accurate budget and to measure performance
precisely. and the
adoption of relatively subjective performance measures. differentiators/prospectors
will make limited use of budgetary controls. which is likely to be the case for cost-leaders/defenders. which conflicts with the widely held view
that innovation and differentiation are best achieved in organizations that minimize
formal controls. corporate
management may not wish to reduce slack in the differentiators/prospectors business
units. suppliers.
Nevertheless. it would chokes innovation and prevents managers from
exploring new market opportunities (Stede 2001). He argued that
differentiators/prospectors face relatively more uncertainty than costleaders/defenders because they have broad product lines.
Prior research has not produced conclusive evidence on the relationship between
management control systems and competitive strategy (Langfield. etc. 1988) found that prospectors emphasize rigid budgetary
controls to a greater extent than defenders.
With respect to the incentive system. However. deal with products that have not yet crystallized. keep their essentially undifferentiated product offerings
relatively stable over time (Fisher and Govindrajan 1993.
H5: differentiators/prospectors put less emphasis on meeting the budget than cost
leaders/ defenders. Govindrajan (1988) and Govindrajan and Fisher (1990)
maintained that prospectors tend to set tight budgets. managers in charge of DIF/PRO
businesses are likely to receive a lower portion of their salary tied to accounting-based
budgetary performance because of the uncertainty involved in pursuing DIF/PRO
strategies.
competitors and regulatory groups. where it chokes innovation and
experimentations.
In addition. For example. the reliance on formal accounting-based budgetary controls is less suitable and
they will also require a higher degree of flexibility to respond effectively to changes
in the environment. Accounting controls (budget)
in general tend not to be associated with innovation. Simons (1987. Therefore we conclude that
H4: differentiators/prospectors have more budget slack than cost leaders/defenders. whereas differentiatiors/prospectors (DIF/PRO) are likely to rely on
scanning the environment for new opportunities. both defender and prospector also typically operate in dissimilar
settings that may affect the ability of corporate management to detect slack.
Hence. although they will be important in the case of defenders. Bourgeois (1981) and Cyert and March (1963) suggested the
slack creation to hedge against uncertainty. Incentives contingent on
2
He defined environmental uncertainty as the unpredictability of the actions of customers. future earnings. For
instance.
99
. in contrast. trend monitoring and
efficiency. 1988). On the other hand. comprehensive planning. hence. provides the
opportunity to prevent the introduction of slack.Smith 1997). 2-3 DESEMBER 2004
environmental uncertainty2 rather than prospectors. Govindrajan 1986. which provide a cushion to support the
exploitation of market opportunities and a source of funds to experiment with product
innovation. engaging in product and market innovation may require
investments that decrease current-period accounting profits despite their potential to
generate substantial.SNA VII DENPASAR – BALI. but uncertain. Costleaders/defenders. many strong evidences have suggested that costleadership/defenders (CL/DEF) will emphasize cost control. engage in produuct
innovation.

Controls can also diminish the intentions of managers to create slack in their business
unit budgets. etc.SNA VII DENPASAR – BALI.
Recent management accounting studies incorporating some or all of
Hofstede’s dimensions of national culture are mostly applied in the area of behavioral
researches. generally is viewed in the (economicsbased) accounting literature as an effective way to stimulate goal-directed
management behavior. 1995).
procedural controls. (1997). both used the same
100
.. but many of them revealed the
contradictory results. 1996. adequate monitoring of performance in these areas. Oddly. expectancy. either because these systems produce
pressures on business unit managers and/or affect the likelihood that slack is detected
(Merchant 1985a). Nicholson et al. Power distance and
uncertainty avoidance) on the relationship between control system tightness. while Chow et al. (1996) examined the effect of
three Hofstede’s national culture dimensions (Individualism.
if accounting-based measures of performance are a less adequate reflection of the
managers’ actions in DIF/PRO units than in CL/DEF units.
Harrison (1992) showed the contradictory results. A strong (if not exclusive) emphasis on budgetary performance
should provide clear guidance to managers as to what is considered important.
The presence of slack in business unit budgets is affected by the design of the
budgetary control and incentive system. Collectively. Clinch 1991). (1996). and then
followed by numerous researchers such as Harrison (1992. Although they were a sign of the
widening area in the behavioral accounting research. 2-3 DESEMBER 2004
accounting-based measures may therefore discourage managers from undertaking
such investments.
Since the critical success factors underlying DIF/PRO strategies tend to be longterm in nature and more difficult to quantify. and centralized directives and found the significant ones.
H7: tight budgetary controls are negatively associated with slack
Incentives can be considered using the theory of operant conditioning as well as
the other motivation theories (e. it is expected that
incentive payments to managers in DIF/PRO units will be conditioned on subjective
performance evaluations by corporate management to a greater extent than in
CL/DEF units (Bushman et al. agency.g. equity and goal setting). Holding business unit managers responsible for clearly
defined results areas. A high percentage variable compensation should increase the
likelihood that bonus amounts are significant enough for managers to influence their
behavior. this suggests that:
H6: incentives for managers in charge of differentiation/prospector business units are
less intensive compared to incentives for managers in charge of cost
leader/defender business units. For example. 1993). (1991) who found the insignificant
relation between individualism and performance by controlling team pay. It was pioneered by Chow et al.
Lal et al. incentives tied to accounting-based
budgetary performance become less suitable because they potentially encourage
managers to be myopic in their decisions (Baber et al. O’Connor (1995).
Operant conditioning theory suggests that an individual’s behavior will be modified
by the rewards or punishments that occur as a result of some action or failure to act on
the part of the individual.
H8: business unit performance-based incentives are negatively associated with slack. Similarly. and
providing compensation for good results.

understandability and clarity of the
101
. there is likely to be a greater need for consultations between superiors and
subordinates.
179). decisive leadership style in high power distance societies is also
likely to produce a preference for high RAPM (reliance on accounting performance
measure) in evaluative style (Harrison 1993. subordinates in low power distance societies
are likely to “react favorably to a low budget emphasis evaluative style because this
style provides the opportunity for subordinates to be consulted” (Lau et al. With low budget emphasis.
The sample
H6
Incentive
Pilot study was conducted to the 34 respondents
that represent the sample by
conducted interview to ensure feasibility. which were Anglo-American managers and Singaporean
manager. In contrary. postulate that a significant interaction of power distance in
mediating the relation between budget emphasis and budgetary slack is likely to
happen.SNA VII DENPASAR – BALI. 322). 2-3 DESEMBER 2004
measurement and samples. Therefore.
Figure I: Conceptual Framework
Budget
Emphasis
H2
H5
PD
H7
H9
H1
Diversification
Slack
H4
Strategy
H3
H8
III. p.1. A favorable subordinate’s
reaction to a performance evaluative style is likely to be associated with less slack in
achieving the budget target. Subordinates or managers are likely to react favorably to a high budget
emphasis evaluative style in a high power distance society because a preference for a
non-consultative. Method
3. hypothesis 9 is stated as:
H9: the interaction term between budget emphasis and budgetary slack is determined
by power distance.
We. greater reliance will be placed on non accounting
performance measures. however. 1997. As non accounting performance measures are likely to be
more subjective and applied in more flexible measures than accounting performance
measures. p.

using 5 items Likert’s scale. The slack measurement consists of
5 items (items 1-4. This study identified 246 firms from 36 parents of manufacturing public
listed firms and randomly allocated 500 questionnaires to them. Measurement of Variables
Corporate diversification was measured by the number of separate entities in
each company as a proxy for the degree of diversification at the highest organizational
level. the more achieving the budget is
emphasized.
3. The higher the score.120).
managers that were responsible in attaining the budget target. 1995). However.SNA VII DENPASAR – BALI. We received 45 and 56 usable responses
from subsidiaries of go-public and non-go public firms. A questionnaire 5 was
attached to a cover letter explaining the purpose of the study and assuring anonymity
was mailed (and e-mailed) to the managers. there were many revisions suggested. Furthermore. The original and back-translated
versions were compared. The Indonesian version was then revised based on the detected differences. Chosen managers were until three levels below the top management in order to
hinder the bias results.
We examine both the subsidiaries from both go public and non go public
parents.752. Budgetary
participation construct developed by Milani (1975) has been revised significantly by Pope and Otley
(1996).
The construct reliability of budget emphasis was 0. 2-3 DESEMBER 2004
questions. then translated into
Indonesian and back-translated into English by different individuals.
A budget contains slack if the business unit manager has intentionally set
his/her budget target lower than his/her honest forecast about the future so that the
budget becomes easier to achieve (Lukka 1988). A complete questionnaire is
presented in the appendix A. A reply-paid self-addressed envelope was
also attached to the cover letter requesting the participants to return the completed
questionnaires directly to the researcher. test for equality of variances and means showed no
differences between those different characteristics (all variables exceed the threshold
level of observed probability 0. Another 200
questionnaires were allocated to the non go public subsidiaries.124 (see Hofstede 1980. that is. respectively.
102
. Brownell (1982. and item 5 is fully anchored
3
Modification of construct is common in behavioral-based accounting research. Budget emphasis was measured by the questionnaire survey consist of 7 items
that scores from 1 (definitely false) to 5 (true) adopted from Stede’s (2000. There were many
remaining differences had to be resolved to finalize the Indonesian version. since respondents did not clearly
understand the meaning after it was translated into Indonesian according to the
methodological sequences. (Please refer to footnote 3). and the most significant
revision made was the omission3 of one of Hofstede’s (1980) power distance
constructs no C.
4
“There are few qualities in a man more admirable tha dedication and loyalty to his company”
5
The questionnaires were initially developed in English by prior researchers. higher incentives are given to the middlehigh level managers.
then translated back into English and again compared to the original English version. (1967). and hence the tighter the budgetary control process is perceived to be. Therefore. because commonly. p. so they are not included in the
study. this study inherently found no problem. Companies with less
than 100 companies were not expected to have clearly defined areas of responsibility
to which managers could be appointed (Dunk 1993). 2001)
published researches. 1983) and harrison also made changes in job satisfaction’s
widely-used questionnaires developed by Weiss et al.2.
Sampling was restricted to managers of budget-related functional area.
Although prior researchers concluded that the subsidiaries of non-go public and
go-public firms might have different characteristics based on their ownership and
equity financing (Singh.1).

the lower score
proves that the business units run in cost-leadership/defender strategy.
Business strategy as Govindrajan and Fisher (1990). At present. “This instrument was based on subordinates’ perceptions of whether their
peers are afraid to disagree with their superiors. The higher score indicates that the business units
operate in differentiation/prospector strategy. 109).316
20.034
: Unidentified
IV. we assumed that there is no other antecedent (i. Second. De ruyter and Wetzels 1999). Therefore. Nevertheless.
The construct reliability was 0. it is the only available instrument for measuring power
distance. p.158
27. we
asked respondents to indicate the percentage of their compensation that is
performance-dependent. Brand
image. 1997. as well as their business units. p. The average of these measures was
employed to determine the extent of incentive systems based on the performance of
corporate. while vice versa. The business unit managers were asked to position their business
unit relative to competitors (on a seven-point scale from significantly lower to
higher) in terms of Product selling price. R&D expenditures. this
test produced a better confirmation about factor dimensions and the causality
relationship between those factors.
183).e. Product quality.Dev ()
5
2
0
7
7
14
18.861
5.434
4. and Product features.641
0. First.
Variable
STRATEGY
DIVRSFTCN
INCENTIVE
EMPHASIS
BDGSLACK
Pow Dist
N
101
101
101
101
101
101
Table 1: Descriptive Statistics
Actual Range
Theoretical Range
Min
Max
Min
Max
Mean() Std. 2-3 DESEMBER 2004
question asking whether the budget is very easy to attain until impossible to attain).074
5. their own business unit
performance (Gupta and Govindarajan 1986).716
Power distance was measured by a nine-item instrument developed by
Hofstede (1980). as
the nine-items of PD’s construct used in this study would be more precisely explain
the extent of power distance (Hofstede 1980.05
Simplis. The
reliability was 0. (Lau et al. we asked respondents to indicate the percentage of
their bonus that depends on total corporate performance v.837
Incentives were measured using two aspects of monetary incentives.101
27. rather than the
latent variables (unobserved variables). as well as their peers’ perceptions of
and preferences for their superiors’ decision making styles”. this is the common method in a behavioralbased accounting research (Stede 2001. Despite the model were threaten as the observed variables.SNA VII DENPASAR – BALI. H 9 was analyzed by moderated
regression analysis.3
35
25
37
5
0
0
7
5
8
25


35
25
40
3.435
25
19
0. Results and Discussion
H1 to H8 were analyzed by Structural Equation Modeling in LISREL 8.867
4.706
5.663
0. In fact.
103
. Power Distance Index (PDI) was not adopted as many prior researchers did. using Porter’s (1980)
Low cost – Differentiation and Miles and Snow’s (1978) Defender-Prospector were
used in this study.

seem do not significantly correlated in the predicted directions.087
-.002
0.158
. Differentiators/Prospectors
experience more slack in their budgetary outcome. The purpose of this method is to figure out the role
of managers’ power distance in the relationship between the rigidity of budget and
the likelihood of managers to create budgetary slack. have a direct effect on
budgetary slack or whether this effect is (in part) attributable to how rigidly the
control system is implemented and/or how the incentive system is designed.002
104
. power distance (moderating variable) and
budgetary slack are independent and dependent variables. The purpose of this multivariate analysis is to test
whether the one to one correlations reported in Table 2 hold significant in the
presence of other intervening variables.
surprisingly.212
0.337
0. budget emphasis. respectively.
Table 3 reports the output of a structural equation model.253
H7
Emphasis
Slack
-0. In other words.002
0. The tight budgetary controls also
seem to have less slack in their budgets.
Table 2
Correlations
Strategy
Slack
Emphasis Diversification Incentive
Slack
.192
0.00) exceeds 0.05 (one-tail)
Table 2 reports the correlation between variables.219*
.085
. although they
have more slack in their budgets.395**
.048
-0. In other words. it tests whether corporate
diversification and business unit strategy.66).064
H3
Diversification Incentive
0. 2-3 DESEMBER 2004
diversification and strategy) affecting the extent of budget emphasis and budgetary
slack.609**
Emphasis
-. indicating lack of operational knowledge about the
various activities of their business units. without be affected by other
determinants of budgetary slack.574
0.9.SNA VII DENPASAR – BALI.
Table 3
Structural Equation Modeling Results
Path from
…to
Sig.004
H6
Strategy
incentive
-0. The structural
equation model tests the hypothesized relationships with all variables entered
simultaneously in the model. Model fit is adequate: (2 is insignificant (p = 0. * p < 0. Further methodologies details are
provided in the footnotes to table 3. the
comparative fit index (CFI=1.
The structural model was set up in LISREL 8. Incentive system and other variables.000
H5
Strategy
emphasis
-0. all variables in the model were treated as the observed variables (by
using the aggregate scale for each construct) and not as latent variables with
multiple indicators.105
PD
-0.

H1
Diversification Slack
0. While business unit strategy
and budgetary emphasis seems to negatively correlated.238*
-.047
Notes: N=101.390
0. using
dummy (dichotomous variable).305**
Diversification .168
-0.
Diversified companies do not put more emphasis on their budgets.01.179
0. **p < 0. respectively.120
Incentive
-.05 Simplis. Because of sample
size limitations.221*
-0.000
H2
Diversification Emphasis
0.198
H4
Strategy
Slack
0.

p= 0. physiological. security. (H 1.338
0.
The success factors underlying DIF/PRO strategies tend to be of a long term
nature and difficult to quantify. the extent of budgetary slack could be higher indeed. or reduce the amount of
information. incentive in charge of
105
. Following Galbraith’s (1973) model in which corporate
management deals with the overload information processed. more diversified firms are not likely to give higher incentive to their
business units manager (H3: p=0. as has been argued by
stewardship theorists (e. 7 per cent). normed fit index (NFI) is 0.90). above the recommended acceptance level
(0. Donaldson 1990). as hypothesized.00. 1991.2531. This study contained both the univariate and multivariate outliers. agency theory may not work well on upper level
management.g. Instead. 1995)
The results showed. =-0.988.g. In addition. Differentiators seem to induce
more slack in their budget. which is above a common recommended value
0. where they were the sample of this study. (1995) mentioned that “outliers should be retained to ensure generalizability to
the entire population… (p.998.000. differentiators do not give more
incentive to their managers (H6) because the differentiated company’s ability to satisfy
a customer need in a way that its competitors can not means that it can charge the
premium price (p=0. In addition. 66)”
Model fit is very good: (2 = 0. since investing in information systems is a high cost
investment. achievement. economic) as the
motivation drivers for their managers.
did not attempt to delete ones. tend to
produce less slack (H4: p=0. while cost-leadership companies. =0. much of the control in diversified firms will be achieved through
financial results-oriented or budgetary controls (Merchant 1981.e.5745).3371). comparative fit index (CFI) is 1. as the number of subsidiaries controlled by
the corporate is increasing. Moreover. corporate tends to let the slack exist in their business units.90 (Hair et al. Monitoring financial
results requires less intimate knowledge of the activities of the various business units
and simplifies top management information processing (Hill and Hoskisson 1987).000 proving the
perfect fit (Arbuckle and Wothke 1999). as shown by significant effect on diversification to the budget emphasis (H 2:
p= 0.3904). because outliers must be viewed within the context of the
analysis and should be evaluated by the types of information they provide. root mean square error of approximation = 0. =0. but also requires a higher degree of flexibility
to respond effectively to changes in the environment. 1994. and self-actualization) are more determined by the corporate
rather than lower order/economic needs (e. which not only make reliance on formal accountingbased budgetary controls less suitable.198. it is
more likely that more diversified corporate are less familiar with the operations of
their businesses.212) at the moderate cut-off (i. Since business unit managers may
underestimate their productive capabilities.
Therefore.000. However. Differentiators seem do not
put higher pressure to attain the budgetary targets. 2-3 DESEMBER 2004
H8
Incentive
Slack
-8.
adjusted goodness of fit index (AGFI) is 0. However. this study
b.. Salter 1973.0022). higher order needs
(growth.061
Notes: a. However.064. as to be the case of cost-leadership
companies (H5= 0. Hence. Donaldson and Davis 1989.002). in contrast. = -0. the reliance on performance-based
incentive was not the only option the corporate has. The ability to increase revenues by charging
premium prices (rather than by reducing costs like the cost-leadership) allows the
corporate to gain above-average profits. =0. =0.SNA VII DENPASAR – BALI.
Hair et al. which make them at a disadvantage to uncover slack (Onsi 1973). corporate management
can either increase the capacity to handle more information.193.0045.
Nevertheless. Instead. Berg
1969). Fox and Hamilton
1994.

reduces the propensity of BU managers to build slack (Milgrom and
Roberts 1992). It can
be observed from the table that the interaction term is negative and significant (p <
0. and 0. it would mean that the relations between the management control feature
and budgetary slack is stronger for managers with high power distance than for
managers with low power distance. assuming that managers seek to maximize personal income. As previously
stated.SNA VII DENPASAR – BALI.884
2. and therefore. p. In addition. To support the hypothesis. p
< 0. curtailed (H 7: p= 0.0026. =0. this study found the
significant one.011). F = 6.307
X3 interaction term
A3
-0. we also found that there is a negative effect between incentives
and budgetary slack at 10 per cent cut-off (H8: p=0.588
Sig. The model explains 25. we divided the sample into
high power distance and low power distance based on the mean score. R2 = 0.
0.3382).350.4 per cent of the variance (adj.
Does managers’ power distance matter?
H9 implies that manager’s power distance moderates the relation between
budget emphasis and budgetary slack. In other words.
This. =-8. power distance and the rigidity
of the budget interact to influence the extent of budgetary slack.011
106
. To test the hypothesis. The hypothesis
was tested using the following regression equation:
Y = a0 + a1X1 + a2X2 + a3X1X2
Y
X1
X2
(1)
= budgetary slack
= budget emphasis
= manager’s power distance (0 for low power distance and 1 for high power
distance)
Using the value of power distance = 1. 2-3 DESEMBER 2004
differentiation/prospector business units is more intensive rather than in costleaders/defender business units.069
-0. equation (1) can be
reconstructed for managers with high and low power distance respectively as
presented below:
For low managers power distance: Y = a0 + X1
(2)
For high managers power distance: Y = (a0 + a2) + (a1 + a3) X1
(3)
H9 posits that there is a significant interaction between budget emphasis and
manager’s power distance affecting budgetary slack. but the negative sign was not expected as displayed in table 3.01)
Table 4: Moderated Regression Results
Variables
Coefficient
Coefficient value
T-stat value
()
X1 budget emphasis
A1
-0. If the interaction is
significant.436
-2. high business unit
performance will be pursued since it translates directly into higher personal income.023
0. However.164.646
X2 manager’s PD
A2
10.0617.1920). however.520
0.
We also found that rigid budgetary controls should increase the likelihood that
slack gets detected (Williamson 1967). a 3 in
equation (1) must be significant and positive.

R = 0.042
0.000
To present more clearly the difference in the slope of the relationship
between budget emphasis and budgetary slack with respect to the low and high power
distance.674 – 0. the question arises as to whether the responses obtained are
representative of the population.505BE
(3a)
The results clearly indicate that the relationship between budget emphasis and
budgetary slack is negative and stronger for managers with low power distance (PD)
than for managers with high power distance.001
8. 2-3 DESEMBER 2004
Constant
A0
22. A comparison of the regression
coefficient of budget emphasis in equation (2a) and (3a) indicates that a unit decrease
in budget emphasis has at least a seven-fold effect on the extent of budgetary slack for
managers with high PD than for managers with low PD (see figure). F = 6. p < 0.SNA VII DENPASAR – BALI. which was by
107
. the values from table III for the relevant coefficient in equation (1) are
inserted to obtain equation (2) and (3)
For low manager’s power distance Y = 22.350.830 – 0. Limitations and Avenues for Further Research
This study carries several inherent limitations.069BE
(2a)
And
For high manager’s power distance Y = 33. Since
the satisfaction of managers with directive or persuasive superior is large for
managers with high power distance (Hofsede 1980) greater reliance will be placed on
non-accounting performance measures in the low budget emphasis
5.
Figure 2: Relationship between budgetary slack and budget emphasis: low and high
manager’s power distance
Budgetary
Slack
High PD
Low PD
Budget emphasis
Surprisingly.25%. The use of questionnaire also introduces the
possibility that the respondents may place a different interpretation on the questions
than did the researchers.164. although the moderating effect of power distance is significant. business unit managers with
high power distance tend to react favorably to a low budget emphasis evaluative style
in achieving the budget target rather than managers with lower power distance. Efforts were made to overcome this limitation. therefore. totally 11. Since the very low response
rate.
the negative sign is not expected. It means.830
2
Notes: Adj.

1982. P. there are some determinants of budgetary slack
which are not included in the study. Managerial Value Systems for Working in Saudi
Arabia: An Empirical Investigation.. 1981. K. 1980. In addition. Spring: 12-27
_________. By overcoming the data difficulty. and M. Organization and
Society 24: 189-204. Further study can also
incorporate other measures of incentives such as group-based incentive Vs
tournament-based incentive suggested by Drake et al. A. and M. Budgetary slack may actually be influenced by
other variables than those considered in the study. The Role of Budgets Facing
Strategic Change: An Exploratory Study. The Role of Accounting Data in Performance Evaluation. W.
References:
Abernethy. R. Kang. by combining the national and organizational culture would
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Structure of Executive Compensation. IL: Richard
D. 2-3 DESEMBER 2004
conducting the pilot study. Organizational Design for Business
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value of differentiator/prospectors and cost-leadership/defender companies based on
its median or mean value. 1999).
Market intensity may affect the extent of accounting control and the
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The role of national culture can also be extended by incorporating other
dimensions of national culture such as individualism. Journal of
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can also be proxied by use of non-financial performance measures that have been
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Brownell. 1998.
Anthony. 1985.e. Autumn: 502-512
108
.
Management Control Systems. Accounting.
McGraw-Hill. (1999). Further
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masculinity. compensation level
and/or compensation change (Ke et.
Bourgeois.. porter’s five forces). 1999.
Ali. 1985. and Peter Brownell. The Concept of Corporate Strategy. On the Measurement of Organizational Slack. or use of long term incentives
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may be better. as well as the
external forces of industry (i.. Academy of
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135-51
Andrews.
Budgetary Participation and Organizational Effectiveness. Irwin-
Baber.
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Budgetary
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_______.
Accounting. Corporate Financial Patterns in Industrializing Economies: A
Comparative International Study. World Bank and IFC. Working Paper: University of
Lancaster. The following statements
listed below are values that have been found prevalent in different individuals. and
Accountability Journal 14: 30-52
Weiss..E.
Appendix
Instruments assessing manager’s power distance
Every individual have its own culture which is a set of values that might be expected
or implicitly required of members of that organization. 1995. D. 1. Auditing.SNA VII DENPASAR – BALI. and Otley. Prentice-Hall. H. R. The Relationship Between Two Consequences of Budgetary
Controls: Budgetary Slack Creation and Managerial Short-term Orientation.
Accounting.
Simons. In Otley and Pollanen. 2000. The Effect of Corporate Diversification and Business Unit Strategy
on the Presence of Slack in Business Unit Budgets. V.
Please place one number (i. O. and Lofquist. Accounting Control Systems and Business Strategy. an Empirical
Analysis.E. Davis.. L. 5) against each of the following eight items to
indicate the extent of your individual’s power distance
1
2
3
4
5
Not at all
To a slight
extent
To a moderate
extent
To a great
extent
To a very
great extent
(1)
Employees lose respect for a
consultative manager
1
2
3
4
5
(2)
A good manager gives detailed
instructions
1
2
3
4
5
(3)
My manager is not concerned
with helping get ahead
1
2
3
4
5
(4)
An employee should not ask for
a salary increase
1
2
3
4
5
111
. R. Englewood Cliffs. Analysis of the Organizational Characteristics Related to Tight
Budget Goals.